How one hypergrowth company is perfecting the art of acquisition -- and maybe even giving roll-ups a good name.
The case
The global economy demands operating efficiency. The result is consolidation in one fragmented industry after another. But often the roll-ups of small companies into large concerns fail because they amount to little more than financial plays -- acquisitions designed mainly to strip out cost, not to strengthen operations and foster growth.
Enter Michael G. Rothman, 44, who thinks he has a better way. Through a series of acquisitions that have emphasized strategic rather than purely financial goals, Rothman has built Kenny Industrial Services LLC into one of the largest players in its industry. In theory, when Rothman consolidates companies, he adds rather than subtracts. Would you be happy to see this man at your company's door?
Taking prisoners
Mike Rothman has always been a man on the move. By the time he was 27 he had acquired his first industrial-services company, which he subsequently grew to $3 million in sales before selling it, in 1989. He then started another company, which he sold in 1992. That company in turn was sold to a division of Waste Management, where Rothman eventually rose to vice-president of marketing. In 1995 he left to start yet another company, Kenny Industrial Services.
Along the way, Rothman jousted with John Manta. Manta's grandfather had arrived in this country from Greece in 1908 and began working as a day laborer, painting steel mills in Gary, Ind. His hard work grew into the J.L. Manta Co., one of the largest industrial-coating companies in the country. Manta, the grandson, started wielding a paintbrush at 13 and eventually joined a sister division of J.L. Manta, HMS Services Inc. Since Rothman and Manta both worked with large manufacturers in the Chicago area, they would often end up bidding ferociously on the same jobs. "We used to kill each other," says Rothman. Echoes Manta: "We were cutthroat competitors. We took every opportunity to take advantage of the other guy."
After one grueling battle, Rothman landed the contract, but, as he recalls, "dropped a lot of money off the table. We had to adjust for that." He placed a call to Manta, who, not surprisingly, did not call him back. When Rothman finally got through, he told Manta he wanted to buy J.L. Manta and HMS Services. Together they could expand their business by offering more services to more customers. Standing alone, they'd just keep fighting over scraps.
Rothman knew his market was changing fast. His customers, Fortune 500 manufacturing companies, were looking to outsource more work to fewer, more capable vendors. Manta could see that, and he could also see that he and Rothman, his fellow survivor, had more in common than he cared to admit. "We were the two companies in the market that were growing the quickest and taking the most prisoners," says Manta. He quickly saw the logic in merging. To seal the deal, he and Rothman went to a White Sox game with their kids. At one point, Rothman turned to his son and, pointing to Manta, said, "See that man? He's the man who used to take food out of your mouth."
Eat or be eaten
In 1998 Kenny Industrial recorded $20 million in sales, which grew to $80 million in 1999. Last year its revenues reached $210 million. The bulk of that growth came from the eight acquisitions Kenny had made of companies like J.L. Manta. In fact, Rothman's acquisition strategy was central to Kenny's growth.
Kenny does not lack for targets, as the two markets in which it operates -- industrial services and coatings -- are as fragmented as they are large. The former, for example, is a $6-billion market divided among 6,500 companies, most of them family owned and grossing less than $20 million a year. Their founders are often looking for an exit strategy, as many lack a next generation that can keep abreast of a dynamic market.
The global economy places a premium on economies of scale. Consolidation has swept through the industrial-services market, just as it has been doing in virtually every other industry. The theory behind doing a roll-up of an industry is that it raises volume and strips out costs, thereby creating value and efficiency. But roll-ups, for all their implied logic, have often done better on paper than in practice. The CEOs who mastermind such consolidation often overreach by paying too much, acquiring too quickly, or simply buying the wrong company. If an acquiring company is public, it often pays the seller with stock, which in today's volatile markets can fluctuate wildly in value. And, finally, roll-ups often don't take into account the clashes of culture that can arise between buyer and seller.
In sum, roll-ups are fraught with hazards. Just ask Paul Kocourek, a senior partner at the consulting firm of Booz Allen & Hamilton Inc., who has studied roll-ups and advised numerous company owners over the past decade. Kocourek says that roll-ups enjoyed "extreme popularity" in the mid-1990s, handsomely outperforming the S&P 500. "Then in early 1998 they tanked," he notes.
Booz Allen followed 81 roll-ups from January 1993 to December 2000. "If every time one of those went public you put a dollar into it, and you put another dollar into the S&P 500, today you would have $92 in those companies versus $264 in the S&P," says Kocourek. Of the 81 companies that the firm studied, only 11 have outperformed the S&P 500, while 20 are either in or near bankruptcy.
What makes it so hard to pull off a successful roll-up? "The first thing is, you need to have a clear idea of how you intend to create value," says Kocourek. A successful roll-up must be more than the sum of many disparate parts. Kocourek cites such value-adding earmarks as the ability to create national or regional accounts, to harness aggregate purchasing power, and to spread best practices throughout the enterprise.
Kocourek says that simple acquisitions -- when one company buys another -- fail some 60% of the time. Roll-ups, by definition, involve dozens, if not hundreds, of acquisitions. Kocourek says that consolidators are faced with hard choices. "They need to move quickly to integrate newly acquired companies," he says, but then they also need a deep understanding of what he calls the "loose-tight" nature of roll-up management.
